Understanding the 5% Free Down Payment Program

Zero Down Payment Mortgages are Gone.
So isn't the 5% down payment program the same thing?

In a nutshell, the answer is yes and no. Let me explain.

Zero Down Payments gave buyers the lowest discounted rates with an exorbinately high CMHC or Genworth Insurance premium, sometimes as high as 7%. That equates to well over a normal down payment for most people. In effect, what was happening with the Zero Down Mortgage product, was that lenders were loaning buyers 100% of the purchase price PLUS the (up to) 7% insurance premium, resulting in a mortgage amount of 107% of the value of the property. This is not a good thing, especially in an unstable market.

The 5% FREE Down Payment program is totally less risky for the lender. If you have excellent credit, and demonstrated job stability, you may qualify. The interest rates charged for this product are NOT discounted, they are Bank Posted.
(see my website rate chart for today's posted rates)

The CMHC and Genworth Insurance premiums are only 2.90% (+ .20 for every 5 years you go up over the 25 year amortization), so it is very reasonable. What this does is enable the lender to protect their interest, and the insurers are confident that there is some equity in the property when the consumer purchases the property. The lenders will actually give the seller, the 5% down payment. There are stipulations that involve you paying back a portion of that 5% down payment, if you sell your property before the end of the first term. Terms are ONLY 5 year and 7 year fixed rate mortgages.

1.5% of the purchase price, must be available for potential closing costs. You may not have been able to save 5% down for a purchase, but lenders and insurers still want to see this amount in your account, for closing costs and any unforeseen costs that may arise from your purchase. You must demonstrate that you are ready and able to cover any costs upon closing. So be prepared to show this amount available in your bank account, it cannot be borrowed or gifted.

For Example: If you are buying a condo for $275,000 you must show $4,125 available in your account for closing. You do not need to give this money to anyone, just prove you have it available in case you need it.

Hope this program is a little easier to understand now.

New Home Buyers Need to Understand Amortizations

THERE IS A LARGE misunderstanding among new home buyers about extended amortizations.

An amortization should be looked at two ways:

1. As a first time home buyer, an extended amortization can enable you to get into a home that you otherwise would not qualify for, due to limited or lower income. This in no way means that you will take 30 or 35 years to pay off that mortgage. In Canada, we have TERMS with our amortization schedules. You choose a TERM, i.e., 3 yr fixed or 5 yr fixed, or 5 yr variable, etc. At the end of your TERM, you will be able to renew AND renegotiate your rate and amortization. So, let’s say that in the 5 years of your TERM, you get pay increases, or other income that will allow you to afford a lower amortization. It is at the end of the existing term that you would request it be lowered.

2. The second use of an amortization is the opposite. Let’s say you have sold your existing home and realized a large equity appreciation (profit). You are using that appreciation (money) as a down payment on your next home. This larger down payment on a move up home, allows you to seriously reduce your amortization and start planning for mortgage freedom. This is when you sit down with me and we discuss the many strategies that are in place to pay your mortgage down as quickly as you can.